DISTRIBUTIVE POLITICS AND ECONOMIC GROWTH

We study the relationship between politics and economic growth in a simple model of endogenous growth with distributive conflict among agents endowed with varying capitalllabor shares. We establish several results regarding the factor ownership of the median individual and the level of taxation, redistribution, and growth. Policies that maximize growth are optimal only for a government that cares solely about pure "capitalists." The greater the inequality of wealth and income, the higher the rate of taxation, and the lower growth. We present empirical results that show that inequality in land and income ownership is negatively correlated with subsequent economic growth.

How is the actual choice of policy determined by individual preferences? The median voter theorem, according to which the tax rate selected by the government is the one preferred by the median voter, provides a useful benchmark. Using this theorem, we establish our main result on the relationship between income distribution and growth. The more equitable is distribution in the economy, the better endowed is the median voter with capital. Consequently, the lower is the equilibrium level of capital taxation, and the higher is the economy's growth. Furthermore, in our model the distribution of income is monotonically related to the distribution of capital. Thus, the central theoretical result that we shall test is that income and wealth inequality are inversely related to subsequent economic growth.

The plan of the paper is as follows. Section I lays out the basic theoretical framework and discusses the links among factor ownership, redistributive policy, and economic growth. Section I1 presents our empirical evidence. Section I11 concludes.

1. The Theory
2. Empirical Evidance
3. concluding remarks

Attachment:- Paper.rar